Hinkley C And The UK Power Market

Date: 29/07/16

Dr John Constable: GWPF Energy Editor

No one wants Hinkley C power station, not because nuclear is in itself a flawed technology, but because the electricity market is so distorted by climate policy that it is dangerous for an investor unless offered subsidies that are wildly expensive for the consumer. Discussion should now shift from the folly of this particular deal to the underlying problems that are making it all but impossible for any despatchable, conventional power station to be built in the UK.

“When the bridegroom jumps out of the window, the wedding is off”, says Gogol, very wisely, and the outlook is little better when neither party to a proposed commercial contract has any deep enthusiasm for the deal. However, when those parties are two governments it is probable that timidity will prevent cancellation and so result in a grim mésalliance, recriminations and costly divorce. How much better it would be if someone would jump out of the window.

EdF’s board very nearly did so yesterday, voting only narrowly, 10 votes to 7, to commit to a Final Investment Decision in Hinkley Point nuclear power station, and it seems probable that the UK government was expecting the decision to go the other way, sparing them the necessary cold-hearted execution. Greg Clark, Secretary of State for the new department of Business, Energy and Industrial Strategy (BEIS) is to be commended on refusing to be hustled into accepting this deal, though outright cancellation would surely have been much better for all concerned than the deferral that he has announced.

As noted in a previous post, the main obstacle to the construction of nuclear power, and indeed any conventional power station in the UK is the distortion of the UK electricity market by climate policies, including the Emissions Trading Scheme and the Carbon Price Floor, but principally the EU Renewables Directive that requires about 35% of UK electrical energy to come from renewable sources in 2020. The residual market is deeply unattractive, being both small and physically variable over all timescales, making it very hard for investors to improve their chances of recovering capital and fixed costs except by charging high and controversial prices per unit of energy sold. The strike price offered to Hinkley, double the market rate, was supposed to overcome this difficulty. The Capacity Mechanism was expected to do the same for gas. Both are outrageously expensive, but neither has been sufficient to motivate the require investment.

Those in EdF’s board who voted in favour of Hinkley C may have hoped that the UK government would now be so short of options that it would grasp the project in desperation, and that this desperation would grow so that after a decent interval had passed the UK would succumb to pressure to increase the subsidies still further. Mr Clark’s decision makes that look very unlikely. Even if the UK government’s decision taken in October is to proceed, this will amount to calling EdF’s bluff. The delay is fair warning, no further subsidies are on offer, and EdF should get out now, while it still can. The window is open…